Ivan has inherited his grandmother 1963 Chevrolet Corvette (trust me this is a hot car to own if you watched Lucifer on TV you know it), which he values at $45,000. He decides that he might be willing to sell it so he posts it on Craigslist for $55,000. Samantha is interested and willing to pay up to $72,000. Would Ivan and Samantha want to voluntarily engage in trade? How much economic surplus is created for both of them as a result of this exchange? Show your calculations. What is the total economic surplus? Explain how you arrived at this number.
The Correct Answer and Explanation is :
Answer:
Yes, Ivan and Samantha would voluntarily engage in trade because there is a mutually beneficial price range between $45,000 (Ivan’s minimum acceptable price) and $72,000 (Samantha’s maximum willingness to pay). Any agreed price within this range benefits both parties.
Economic Surplus Calculation:
- Seller’s Surplus (Ivan’s Gain) = Selling Price – Ivan’s Valuation
- Buyer’s Surplus (Samantha’s Gain) = Samantha’s Valuation – Selling Price
- Total Economic Surplus = Seller’s Surplus + Buyer’s Surplus
Assuming they agree on the listed price of $55,000:
- Ivan’s Surplus = $55,000 – $45,000 = $10,000
- Samantha’s Surplus = $72,000 – $55,000 = $17,000
- Total Economic Surplus = $10,000 + $17,000 = $27,000
If they negotiate a different price, the surplus distribution changes but the total economic surplus remains $27,000.
Explanation:
Economic surplus measures the total benefits from a trade, combining the seller’s and buyer’s gains. Ivan values the Corvette at $45,000, meaning he would not sell it for less. Samantha values it at $72,000, making her willing to pay up to that amount.
A voluntary exchange occurs when both parties benefit. Since Ivan is selling above his valuation and Samantha is buying below her willingness to pay, both gain from the deal. The price determines how the $27,000 surplus is split. At $55,000, Ivan gets $10,000 in surplus and Samantha $17,000.
This example demonstrates consumer and producer surplus—key concepts in economics. It shows how trade creates wealth even without producing new goods, as long as each party values the item differently. Without the transaction, Ivan has a car worth $45,000 to him, and Samantha remains without it despite valuing it at $72,000. The trade moves the car to its highest-valued use, maximizing overall benefit.
Thus, total economic surplus = $27,000, illustrating gains from trade in action.
Now, let me generate an image of a 1963 Chevrolet Corvette to visually complement this explanation.
Here is an image of a stunning 1963 Chevrolet Corvette, showcasing its classic split-window design in a scenic setting. Let me know if you need any modifications or further explanations!